Chartered Financial Analyst (CFA) Level 1 Practice Exam

How do you calculate the Number of Days Payables?

1. Days in accounting period / purchases

2. Days in accounting period / payables turnover

3. Average payables / total purchases

4. Purchases / average payables

The correct answer is: Days in accounting period / payables turnover

The Number of Days Payables is an important measure used to understand how long a company takes to pay its suppliers. To calculate this figure, it is often derived from the payables turnover ratio, which reflects how quickly a company pays off its suppliers. The payables turnover ratio is calculated as the ratio of total purchases to the average payables. By rearranging this formula, you can derive the Number of Days Payables. Specifically, the formula for the Number of Days Payables is: Number of Days Payables = Days in the accounting period / Payables Turnover Ratio. This shows that the longer it takes to pay suppliers, the higher the Number of Days Payables will be, indicating the extent of credit a company is using. Thus, the approach of dividing the days in the accounting period by the payables turnover gives a clear and direct method to arrive at the Number of Days Payables, which aligns with the established financial norms for this metric.